Institutions, Infrastructure and East African Community Membership of Burundi and Rwanda on Trade

Abban, Stanley (2020): Institutions, Infrastructure and East African Community Membership of Burundi and Rwanda on Trade.

Abstract

The East African Community (EAC) is in a quest to integrate further to form a currency union. However, empirical evidence has shown that policies initiated as a panacea have failed due to weak institutions. In this background, the study seeks to investigate the role of existing institutions on trade using an augmented gravity model of trade. The Poisson Pseudo Maximum Likelihood (PPML) was used due to its efficiency. Also, the study estimates the impact of infrastructure on trade. Additionally, the study estimates whether Burundi and Rwanda gained from joining EAC in 2009 or rather contributed significantly to trade in EAC. The study showed that institutions are not contributing significantly to trade. Additionally, the study showed that infrastructure had a positive impact on trade. The study also showed that Burundi and Rwanda benefited from joining the EAC by a combined 81%. The study concludes that there is a greater potential to trade therefore an exigency for a new institutional framework and reforms to facilitate trade by reducing trade and non-trade barriers.

• Item Type: MPRA Paper
• Language: English
• Keywords: East African Community (EAC), Currency union, institutions, gravity model of trade, Poisson Pseudo Maximum Likelihood (PPML), infrastructure, trade barriers, non-trade barriers
• Subjects: F - International Economics > F1 - Trade; F - International Economics > F1 - Trade > F15 - Economic Integration; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O17 - Formal and Informal Sectors ; Shadow Economy ; Institutional Arrangements

References

Álvarez, I. C., Barbero, J., Rodríguez-Pose, A., & Zofío, J. L. (2018). Does institutional quality matter for trade? Institutional conditions in a sectoral trade framework. World Development, 103, 72-87. Antràs, P., Helpman, E., Nunn, N., Trefler, D., Ottaviano, G. I., Costantini, J. A., ... & Ma, H. (2008). The Organization of Firms in a Global Economy. Ades, A., & Di Tella, R. (1999). Rents, competition, and corruption. American economic review, 89(4), 982-993. Antras, P. (2003). Firms, contracts, and trade structure. The Quarterly Journal of Economics, 118(4), 1375-1418. Avis, W.R., 2016. Online/social media as a pathway towards violent extremism in East Africa. GSDRC Helpdesk Research Report 1,373. Birmingham, UK: GSDRC, University of Birmingham.

Abasimi, I., Li, X. and Khan, M.I., 2018. The Impacts of Institutions on International Trade in Ghana’s Economic Perspective. International Journal of Academic Research in Economics and Management Sciences, 7(4), pp.32-43.

ABDUL-WAHAB, J., 2018. Institutions, trade and economic growth (Doctoral dissertation, KDI School).

Anderson, J. E., & Van Wincoop, E. (2003). Gravity with gravitas: A solution to the border puzzle. American economic review, 93(1), 170-192.

Balistreri, E.J., Tarr, D.G. and Yonezawa, H., 2014. Reducing Trade Costs in East Africa: deep regional integration and multilateral action. The World Bank.

Beyer, H., & Fening, F. (2012). The impact of formal institutions on global strategy in developed vs. emerging economies. International Journal of Business and Social Science, 3(15). Baeten, J., & den Butter, F. A. (2006). Welfare gains by reducing transaction costs: Linking trade and innovation policy. Barasa, L., Knoben, J., Vermeulen, P., Kimuyu, P. and Kinyanjui, B., 2017. Institutions, resources and innovation in East Africa: A firm level approach. Research Policy, 46(1), pp.280-291.

Berkowitz, D., Moenius, J., & Pistor, K. (2006). Trade, law, and product complexity. the Review of Economics and Statistics, 88(2), 363-373. Bobková, B., 2012. Gravity model estimation using panel data-is logarithmic transformation advisable?.

Beck, U., 2002. Individualization: Institutionalized individualism and its social and political consequences (Vol. 13). Sage.

Coase, Ronald H.(1992).“The Institutional Structure of Production.” American Economic Re-view. September, 82, pp. 713–19 Claessens, S., & Laeven, L. (2004). Competition in the financial sector and growth: A cross-country perspective. In Financial Development and Economic Growth. Palgrave Macmillan, London, (pp. 66-105) Cunat, A., & Melitz, M. J. (2012). Volatility, labor market flexibility, and the pattern of comparative advantage. Journal of the European Economic Association, 10(2), 225-254. Chor, D. (2010). Unpacking sources of comparative advantage: A quantitative approach. Journal of International Economics, 82(2), 152-167.

Costinot, A. (2009). On the origins of comparative advantage. Journal of International Economics, 77(2), 255-264.

Cichecka, A., 2018. EAC–an Answer for Regional Problems or Failed Solutions in East Africa?. Politeja-Pismo Wydziału Studiów Międzynarodowych i Politycznych Uniwersytetu Jagiellońskiego, 15(56), pp.267-277.

Easterly, W. (2001). The lost decades: developing countries' stagnation in spite of policy reform 1980–1998. Journal of Economic growth, 6(2), 135-157. Eichengreen, B. and Irwin, D.A., 1996. The Role of History in Bilateral Trade. Working Paper 5565, National Bureau of Economic Research.

Grossman, G. M., & Helpman, E. (2002). Integration versus outsourcing in industry equilibrium. The quarterly journal of economics, 117(1), 85-120. Gourieroux, C., Monfort, A. and Trognon, A., 1984. Pseudo maximum likelihood methods: applications to Poisson models. Econometrica: Journal of the Econometric Society, pp.701-720.

Gourieroux, C., Monfort, A. and Trognon, A., 1984. Pseudo maximum likelihood methods: Applications to Poisson models. Econometrica: Journal of the Econometric Society, pp.701-720.

House, F., 2018. Freedom in the world 2018: Democracy in crisis. Retrieved on, 24.

House, F., 2015. Freedom of the Press 2015: Harsh laws and violence drive global decline. Freedom House.

Iwanow, T. (2012). Essays on Institutions and International Trade (Doctoral dissertation, The University of Manchester (United Kingdom)).

Kishor, N.K. and Ssozi, J., 2011. Business cycle synchronization in the proposed East African Monetary Union: An unobserved component approach. Review of Development Economics, 15(4), pp.664-675.

Kaminchia, S.M., 2019. The Determinants of Trade Costs in the East African Community. Journal of Economic Integration, 34(1), pp.38-85.

Krenz, A. (2016). Do political institutions influence international trade? Measurement of institutions and the long-run effects. Center for European, Governance and Economic Development Research Discussion Papers Number. Karau, J.N. and Mburu, T.K., 2014. Institutional, Governance and Economic Factors Influencing Foreign Direct Investment Inflows on East Africa (Doctoral dissertation, Doctoral dissertation).

Kaufmann, D., & Wei, S. J. (1999). Does" grease money" speed up the wheels of commerce? (No. w7093). National bureau of economic research.

Kipesha, E. F. (2012). Efficiency of microfinance institutions in East Africa: a data envelopment analysis.

Leftwich, A., & Sen, K. (2010). Beyond Institutions. Institutions and Organisations in the Politics and Economics of Poverty Reduction–A Thematic Synthesis of Research Evidence. IPPG Research Consortium on Improving Institutions for Pro-Poor Growth, University of Manchester. Levchenko A. A. (2007) Institutional Quality and International Trade. Review of Economic Studies 74 (3): 791-819. McLaren, J. (2000). " Globalization" and vertical structure. American Economic Review, 90(5), 1239-1254. Martin, W. and Pham, C.S., 2015. Estimating the gravity model when zero trade flows are frequent and economically determined. The World Bank.

Muluvi, A., Kamau, P., Githuku, S. and Ikiara, M., 2012. Kenya’s trade within the East African community: institutional and regulatory barriers. Accelerating Growth through Improved Intra-African Trade, 20.

Masson, P.R. and Pattillo, C., 2004. The monetary geography of Africa. Brookings Institution Press.

Musonda, F.M., Mjema, G. and Danielson, A., 1997. The Urge to Merge: The Revival of East African Cooperation. Sida.

North, D. C. (1990). A transaction cost theory of politics. Journal of theoretical politics, 2(4), 355-367.

Nunn, N. (2007). Relationship-specificity, incomplete contracts, and the pattern of trade. The Quarterly Journal of Economics, 122(2), 569-600.

Norley, P. and Rosenthal, J., 2019. Institutions for trade: translating trade into development impact.

Ogundipe, A.A., Ojeaga, P. and Alege, P.O., 2014. International Trade, Do Institutions matter? Evidence from Regional Studies. International Trade, Do Institutions matter? Evidence from Regional Studies, 5(18), pp.123-134.

Okumu, W., 2010. Resources and border disputes in Eastern Africa. Journal of Eastern African Studies, 4(2), pp.279-297.

Peng, M.W., Sun, S.L., Pinkham, B. and Chen, H., 2009. The institution-based view as a third leg for a strategy tripod. Academy of Management Perspectives, 23(3), pp.63-81.

Ranjan, P., & Lee, J. Y. (2007). Contract enforcement and international trade. Economics & Politics, 19(2), 191-218.

Rodrik, D., Subramanian, A., & Trebbi, F. (2004). Institutions rule: the primacy of institutions over geography and integration in economic development. Journal of economic growth, 9(2), 131-165. Shirley, M. M. (2005). Institutions and development. In Handbook of new institutional economics (pp. 611-638). Springer, Boston, MA.

Shirley, M. M. (2005). Institutions and development. In Handbook of new institutional economics (pp. 611-638). Springer, Boston, MA.

Silva, J.S. and Tenreyro, S., 2011. Further simulation evidence on the performance of the Poisson pseudo-maximum likelihood estimator. Economics Letters, 112(2), pp.220-222.

Sutton, T., Short, J.C., McKenny, A.F. and Namatovu, R., 2015. Institutional factors affecting expansion within the East African community: An analysis of managers’ personal stories. Africa Journal of Management, 1(4), pp.365-383.

Sutton, T., Short, J.C., McKenny, A.F. and Namatovu, R., 2015. Institutional factors affecting expansion within the East African community: An analysis of managers’ personal stories. Africa Journal of Management, 1(4), pp.365-383.

Unsworth, S. (2010). Upside Down View of Governance. Institute of Development Studies (IDS).

UNCTAD, D., 2018. FDI/MNE database.

van Ufford, P.Q. and Zaal, F., 2004. The transfer of trust: ethnicities as economic institutions in the livestock trade in West and East Africa. Africa, 74(2), pp.121-145.

Williamson, O. E. (1979). Transaction-cost economics: the governance of contractual relations. The journal of Law and Economics, 22(2), 233-261. Winters, L. A. (2004). Trade liberalisation and economic performance: an overview. The Economic Journal, 114(493), F4-F21. Wei, S. J. (2000). How taxing is corruption on international investors?. Review of economics and statistics, 82(1), 1-11.